July 31, 2013

Among the many trading conferences I have had the fortune to attend over the years the question has always arisen as to how many stock and derivatives exchanges there would be in three, five or even ten years time. Depending on who one canvassed the answer was always different but tended to be less – not more. But the degree was often debated. Some pundits suggested there would be five or six global players in the end analysis.

My thoughts returned to this issue with news that Aquis Exchange, a proposed pan–European stock exchange established in October 2012 that has applied for regulatory approval as a Multilateral Trading Facility (‘MTF’) from the UK’s Financial Conduct Authority.

For sure Alasdair Haynes, CEO of Aquis Exchange who was once in the running to head the London Stock Exchange (‘LSE’), is an astute operator and seasoned City veteran. Clearly the opening of this exchange’s doors to the BT Radianz Cloud community provides them with an opportunity to gain rapid access to the widest possible range of market participants and traders. It is also touted as extending the benefits of their subscription pricing model to all professional investors.

However, have we not been here before? Aquis Exchange now joins over 100 trading venues that are already part of the BT Radianz Cloud community and one wonders how much longer that number can be maintained. To its credit Aquis is seeking to ‘revolutionize’ the European trading landscape by introducing subscription pricing and innovative order types. Others have tried before and not always succeeded.

The EU’s Markets in Financial Instrument Directive (‘MIFID’) led to a plethora of trading venues across Europe in its aftermath and resulted in a significant contraction in execution tariffs for trading equities. This was welcomed by banks and broking houses who felt they were frankly being ‘milked’ by incumbent exchanges in the shape of the London Stock Exchange (‘LSE’) and Deutsche Boerse amongst others.

At one point post ‘MiFID I’ coming into play there were nineteen separate trading venues for UK equities, while Europe became home to 27 exchanges and 19 MTFs. Clearly it spurred competition but such fragmentation was not sustainable long term, And, so it proved. Mondo Visione, a firm monitoring the share price performances of quoted exchanges globally, today still analyses 25 such entities in its FTSE Mondo Visione Exchanges Index.

In the intervening years new players – MTFs and dark pools – have either closed down or been acquired by stronger operators. With the average trade execution cost for trading equities in Europe having plummeted from 2 basis points (bps) at MiFID’s outset to 0.2bps now the commercial model for many was unsustainable. The upshot? Many new entrants operated at a loss, with just a few at breakeven and fewer still making a profit.

Exchange venue fragmentation subsequently gave way industry reconsolidation. And, even the big operators ‐ the LSE included via its LCH.Clearnet Group acquisition – have sought to provide their customers with value–added services on the post–trade side (clearing and settlement).

The current position where over 90% of European equity trading in each individual European country takes place on just two exchanges equally might not be viewed as so rosy either. Aquis’ aim like rival exchanges/MTFs such as Boerse Berlin’s Equiduct with its innovative market model to bring fresh competition into the marketplace and to lower the trading costs maintained by the existing duopoly is admirable.

Price and choice are one thing, but fundamentally it will all come down to liquidity, speed of execution, added offerings across the trade lifecyle and the most efficient model – vertical or otherwise. Europe probably needs more than just two exchanges, but probably less than twenty.

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by Roger Aitken